Food prices face new surge

Global food prices face a new surge. In Chicago wheat and rice prices for delivery in March 2008 have jumped to an all-time high, soyabean prices are at a 34-year high and corn prices at a 11-year peak. The agricultural commodities price rises are the result of high demand, poor harvests and low stockpiles of food.

Food prices in the UK are more than 5 per cent higher than a year ago. Bread prices have jumped 11.6 per cent over the last year, double the increase for cake or biscuits. Butter and eggs are about a third more expensive than last November, milk prices are 16.6 per cent higher and cheese is up 8.8 per cent.

Eurozone food price inflation was up to 4.3 per cent in November. It was one of the main reasons for the jump in the zone's annual inflation rate from 2.6 per cent in October to 3.1 per cent, the highest level in six years. In the US, annual food price inflation of 4.8 per cent in November combined to a rise in the inflation rate to 4.3 per cent.

Deeper long-term economic influences are likely to have more influence on the future supply and demand of major food commodities and therefore on medium to lomg-term price levels, than the current boom in biofuel production. This is the main conclusion of a new report from the International Food Policy Institute: Food . One might add, however, that biofuel demand is more susceptible to the effects of policy initiatives, in particular over generous subsidies and tax reliefs.

The report points out that while overall world economic growth is likely to remain in the 4 per cent a year average range, growth in the developing countries with expanding food demand is expected to average 6 per cent a year well into the next decade. IFPRI points out that of the world's most food insecure countries, which have the greatest propensity to import food, twenty-two had average annual growth rates ranging from 5 per cent to 16 per cent between 2004 and 2006.

What IFPRI characterises as 'diet globalisation' is also a major long-term demand changing factor. More affluent city-dwelling Asian consumers are increasingly seeking non-traditional foods. This is leading to reduced rice consumption and increased consumption of wheat and wheat-based products, temperate-zone vegetables and dairy products - and increases in demand for animal feeds for the livestock producing many of these foods.

One by-product of rising food prices is that import tariffs for agricultural commodities, in paricular cereals, vegetable oils and rice, are being slashed in an effort by developed and developing countries to cushion their local markets against rising food inflation. On the other hand, export tariffs have been raised by several key exporting countries such as Argentina in an attempt to keep local markets well supplied.

Given that the rise in food prices is not likely to be a short-term phenomenon, one might question why the commercial aspects of farming continue to require subsidy.

Wine reform watered down

EU farm ministers have agreed a reform package for the wine sector that dilutes the package proposed by Commissioner Fischer Boel. Pressure from France and Italy means that fewer vineyards will be scrapped and the surplus of low quality wine will continue to be distilled for industrial use over a four year period.

The Commission's plan to outlaw chapitalisation (using sugar or must to add sweetness to alcohol) has been scrapped and it will still be allowed in those statements where it is already legal. This proposal was opposed by Austria, Germany and Hungary. One consequence is that subsidies will have to be prolonged to producers in the southern states which use must as the grape juice is more expensive.

Traditionalists will also be pleased that an overall harmonisation of labelling practices throughout the EU as planned by the Commission will not take place. However, winemakers not using geographical indications and designations of origin will in future be allowed to indicate their wines' grape variety and vintage on the label.

In this connection, UK Labour MEP Brian Simpson commented, 'This is the battle for the £6 bottle. There is too much snobbery about wine, which has caused the resistance.'

Much of the annual €1.3bn EU wine budget, about half of which buys up unwated wine, will be put into national envelopes for member state governments to use in promotion and restructuring.

Putting a brave face on the deal, Commissioner Fischer Boel admitted, 'We didn't get everything we wanted, but we have ended up with a well-balanced agreement.' In other words, the wine producing states have exerted effective pressure to defend their interests.

The underlying problem is that traditional growers like France and Italy have been consuming a third less of their own crop. Where consumption is growing in countries like Britain and Sweden, it is often being driven by 'New World' wines which are perceived to offer better value.

Whether the EU wine lake can be drained in five years as is hoped remains to be seen. Much will depend on effective implementation at member state level.

Join the CAP health check debate

You can do so at: Debate . Jack Thurston of farmsubsidy.org starts off with a critique of the shortcomings of the Health Check, but gets slagged off later for 2nd rate left-wing journalism! Inevitably, those with axes to grind are there whether ideological (GM) or particular (suckler cows in N.Ireland). There is also a plaintive plea for more information in Bulgarian.

I suppose that my view of these exercises is that they give the semblance of participation while the real decisions are taken elsewhere. As a debate, it is very difficult to get people to move from their fixed positions.

Launching the debate, Fischer Boel once again showed her susceptibility to food security discourses. Referring to an 'atmopshere of anxiety' surrounding the markets, she said: 'Renewed awareness of the importance of food is a good thing. We should never be complacent about supplying life's basic necessities.'

Given that farmers (other than livestock farmers) are now getting a better return from the market, one might think that now was a good time to substantially reduce subsidies.

In her presentation to the European Parliament Agriculture Committee, Fischer Boel seemed to go further than the Communication itself, for example by clearly indicating her preference for a longer-term shift towards a flat rate Single Farm Payment or for ending the 45€/ha. energy crop premium.

Meat: facing the dilemmas

The excellent Food Ethics published by the Food Ethics Council has devoted its latest issue to this theme. You can read excerpts online at: Meat

There are a lot of issues related to increasing meat consumption: climate change; health issues; water scarcity and biodiversity loss from clearing forests to make way for pasture and feed production; and animal welfare, which is certainly not a luxury we can no longer afford. The FAO calculates that livestock account for 18 per cent of total anthropogenic greenhouse gas emissions. Cows and sheep burp a lot releasing methane, which has a global warming potency 21 times greater than CO2.

In his introduction to the edition, Tom MacMillan suggests that 'the challenge is not only to eat less but also to eat better meat - produced in more humane and environmentally sound production systems yielding a better quality product.' Henry Buller reports in the issue from his innovative 'Eating Biodiversity' project on this theme.

I have not yet read all the articles, but what strikes me is that although there are plenty of references to the FAO and some to the OECD and WTO, the EU and the CAP are conspicuous by their absence. Surely the EU should be contributing to this debate and developing proactive policies that bring together a number of related objectives in different spheres of policy? Or is that too much to hope for?

Health Check Attacks Peripheral Ills

It is difficult to say anything new about the CAP Health Check proposals because they have been leaked so extensively. What they amount to is finding a patient who has a number of chronic long-term illnesses which require radical treatment, but then proposing to concentrate attention on the patient's toothache and Athlete's Foot.

The proposed capping of payments to large farms is intended to increase the popularity of the policy by reducing transfers from taxpayers to those who are already propserous. It thus would enable the Commission to portray the policy as one that primarily helps small, marginal or peripheral farmers, albeit in a very inefficient fashion. The issue of why there should be subsidies at all for commercial aspects of farming activity is thereby evaded.

The industry's protectionist subsidy seeking mindset has not actually helped it. It has diverted attention from the needs of the customer and the opportunities presented by higher value added products. A recent example is to be found in efforts to get more Government purchases of food sourced from Britain. Presumably more is not being so sourced because of price/quality problems. Why not identify and tackle those problems?

I never expected much from the Health Check. But there is a need to aim for a more radical reform of policy in the run up to 2013.

EU warns Romania on farm payments

Romania has been told to tighten controls in its farm payment systems or face a severe cut in it subsdies next year from the EU. The European Commission said that independent auditors Deloitte had found 'major deficiencies in the software module designed to ensure that payments are made correctly.'

The Commission said that Romania could lose about €180m in subsidies next yar if it failed to correct problems in its software systems. It delivered the warning amid persistent complaints from some of the EU's western European members that Romania was not fully prepared for the challenges of EU membership when it became a member last January.

The financial stakes are high because Romania is due to recive €443m in direct payments next year, part of a grand total of €4.3bn between now and the end of 2013. Agriculture accounts for about 40 per cent of employment.

New Farm Bill 'offers no reform at all'

At one time in the 1990s it seemed as if the USA might lead the way in reducing farm subsidies. Not any more. A new version of the US Farm Bill, just approved by the Senate's Agriculture Committee, has been attacked by acting US farm secretary, Chuck Conner. The long-awaited Senate version of the Bill, which follows one from the House of Representatives in August, provides plenty of goodies for American farmers for the next five years. For example, there would be a permanent $5bn 'disaster' fund.

Mr Conner said bluntly that the draft Bill offered 'no reform at all'. The lack of a meaningful cap on payments would allow millionaires to continue to participate in farm programmes. Just how widespread this practice is has been illustrated by our friends at CAP Health Check by superimposing the number of beneficiaries on a Google map of New York City. Other wealthy areas in cities like Los Angeles also contain their fair share of sofa farmers.

It's a story all too familiar in Europe: take away money from taxpayers and consumers on average incomes or less and give to wealthy landowners.

CAP still takes up nearly 47 per cent of budget

The CAP still took 46.7 per cent of overall allocated EU expenditure in 2006, compared to 46.2 per cent in 2005, according to figures released by the European Commission. However, this represents a decrease on the 49 per cent figure in 2003. It also accounted for 0.44 per cent of GNI.

The ten accession states received 9 per cent of overall CAP funding including 27.4 per cent of the Rural Development Budget. France remains the individual member state with the largest share of spending but this was down from 20.7 per cent in 2005 and 21.6 per cent in 2004.

68.4 per cent of the money was spent on direct aids, roughly half of which went on the SPS in the EU-15. Spending on export refunds and intervention dropped to just 5 per cent and 1.5 per cent of the CAP budget respectively.

Five member states (Austria, France, Ireland, Portugal and Spain) are net beneficiaries of the CAP budget, as are virtually all new member states (Malta got only €9.4m in agricultural spending). Their share of spending will increase in the coming years with the phasing in of the SFP.

More details at: Finances

Productionists bang the food security drum

It has been evident for some time that those who would want to see a switch away from a greater emphasis on environmental issues in relation to agriculture and a restoration of a productionist orientation have seen food security as one of their best cards.

In part this is because food supplies are getting tighter. Supply has been affected by growing demand for biofuels and other non-food crops. Demand is being stimulated by a growing and more prosperous world population.

So could 'the UK run short of food in the future' as is argued by regular Farmers Weekly contributor Hugh Brown (who combines farming with working full time for Capital Radio). This shows a not unsurprising lack of faith in the price mechanism for a farmer.

If the supply-demand balance alters, prices will go up and this will encourage more production. Of course, the land supply is not infinite, but there is plenty of land in the world, not least in the Global South, that is not being farmed as efficiently as it could be (without having an adverse environmental impact). Of course, climate change is a big uncertainty, but this shows why it should be a priority in decisions about farm policy.

Brown concentrates a lot on his fire at Defra, and it is certainly a department that has had its problems. From a farming perspective, of course, it no longer acts as the voice of the farmer in the way that MAFF did, but that was one of the reasons for setting up Defra with a new mission.

Brown argues, 'If we do start to go short of food and need to start planning seriously about how we feed the nation, it would be somewhat of a contradiction to have the same department both try to encourage the growing of food, while the other part of the department is trying to nail down environmental regulation, potentially curtailing food production.'

His solution is to give the food part of Defra its own department, presumably a Ministry of Food Security, so that 'it might be able to work more effectively in planning ahead.' The shadow of Stalinist five year plans dies hard in some areas of farming. That is not to say that we shouldn't continue to fund work that is concerned with diseases and pests that affect plants and livestock and hence undermine production.

However, given the challenge of climate change, not to mention various pollution issues, farming needs to be guided by an effective environmental policy, but also one that provides farmers with incentives for maximising environmental benefits.

Fischer Boel rebuffs twitchers

EU agriculture commissioner Mariann Fischer Boel has rebuffed claims by the Royal Society for the Protection of Birds (RSPB) that the time has come for a new CAP. The suggestion is made in a report launched by the RSPB and its associated global organisation Birdlife International: New challenges, new CAP

RSPB head of agriculture Gareth Morgan had the temerity to suggest that the CAP needs a far greater environmental element to retain its current budget: 'That means scrapping subsidies and, instead, rewarding farmers for measures to help tackle climate change, reverse widlife declines and improve water quality.'

But Fischer Boel was having none of it. She insisted that much of what the organisations were asking for was already being delivered by the CAP: 'You say you want a new CAP ... today's CAP has a huge number of "new" elements compared with a few years ago.' Of course there are significant new elements, but whether that amounts to a new policy is another matter altogether.

Fischer Boel went on to explain that the forthcoming 'health check' would provide scope for further refinement. But refinement is just what it is. As contributors to the CAP HealthCheck blog have pointed out, an opportunity is being missed to do some fundamental thinking about the objectives of the CAP and how they can be delivered. See: Health Check

Capital gains tax hit on farmers is not good news

Why should anyone who wants to see a more modern agriculture in Britain be concerned about the fact that the measures announced by the Chancellor in the pre-Budget report impose a greater tax burden on farmers?

Because it may discourage farmers from selling up. That is an important mechanism for restructuring farms to permit greater efficiency. It also allows new capital and younger managers with new ideas to come into the industry. Even if average age statistics can be misleading, there are still many farmers who started farming when maximising production with the help of subsidies was the favoured policy.

Farmers have been hit particularly hard by the Chancellor's scrapping of indexation allowances. This reduces taxable gains on assets held long term. It has had the effect of making tax free the first 105 per cent of gains on farmland held since at least 1982, leaving only gains above that amount subject to capital gains tax.

Farm prices have been buoyed by a number of factors. The availability of substantial subsidies has been one factor, but farms within easy reach of London have often been purchased for lifestyle and/or sporting reasons. The recent hike in crop prices also makes arable farms a more attractive investment.

Some farmers who have been thinking of selling up may now try and do so before April, but that may entail some discounting as purchasers will be well aware of the tax penalties attached to a delayed sale.

The environmental impact of ending set aside

Idling land resources through set aside never made a lot of economic sense and was largely a way of dealing with over production encouraged by the old style CAP. However, many environmentalists felt that set aside encouraged biodiversity.

This was particularly the case for the Royal Society for the Protection of Birds (RSPB) which with over a million members, largely urban gardeners whose bird identification skills are sketchy, is a very influential conservationist group in the UK. Defra policy is strongly influenced by the RSPB which has framed the agenda in terms of, for example, using farmland bird populations as an indicator of environmental stress, although they may not the best measure.

The RSPB view, as expressed by head of conservation Sue Armstrong Brown, is that 'One of the strengths of set-aside was simply that there was lots of it. It made the whole countryside more varied and wildlife loves variety.' The NFU, in contrast, argues that it is a blunt policy instrument and that only a small part of set aside ever had great environmental value.

Defra secretary Hilary Benn has stepped in to warn farmers to look after habitats and bird numbers after set aside has gone, or face new regulations to compel them to do so. He announced an immediate programme of environmental monitoring of farmland.

In fact, as Don Curry has pointed out, this is an English policy manifestation of a mich wider debate. As commodity prices have risen, global tensions between the use of land for food, fuel and the creation of environmental benefits have increased. There are no easy answers, but a debate is needed.

Capping SFPS is on the agenda again

Leaks from Brussels suggest that capping Single Farm Payments is on the agenda for the forthcoming Health Check. This was mooted at the time of the last reform and defeated by opposition from Britain and Germany who would have lost out the most.

The last set of proposals envisaged an overall ceiling, but this time reductions would be tapered to make them more palatable. There would be a 10 per cent reduction on payments about €100,000, 25 per cent off payments above €200,000 and 45 per cent off payments above €300,000. As an additional incentive, money saved by the 'capping' would stay in a member state and be added on to its national envelope for targeted receipts.

There would also be a lower limit on payments to save the transaction costs of payments to owners of horse paddocks or hobby farms. These tend to gum up the payments system and are not supporting anything that resembles a commercial farming activity.

Reducing payments to large-scale farmers, some of them members of Europe's royal and aristocratic families, would seem to be a no brainer. In a sense, however, it is penalising the more economically efficient farmers who are often better suited to compete in an international market. That being so, perhaps they should not have subsidies at all, but then no farmer should be receiving non-specific subsidies (other than a pay off in the form of a bond).

There is also a difficult technical problem. How does one define what constitutes a farm? Ownership of large estates could be subdivided among different companies. Lawyers have always been adept at spotting new loopholes in the CAP and they could be the real beneficiaries of these proposals. However, I doubt whether they would go through in the form suggested.

EU fails to respond to booming global dairy market

The EU has largely failed to respond to a booming global dairy market. Milk deliveries actually fell by 1.5 per cent in 2006 despite an increase in quotas. All sorts of explanations are being trotted out such as the threat of high super-levy penalties and even the expiry of the transitional period in the A10 countries (this allowed for domestic marketing not to comply fully with EU criteria).

An alternative explanation is that the quota regime has ossified the structure of the dairy industry in the EU, holding back the more efficient and protecting more marginal farmers (which indeed is one of its intentions). Quota can be transferred in some countries (the rules differ), but despite the existence of an internal market, it cannot be transferred across national borders. The consequence is that the EU's dairy processing industry has been handicapped in responding to new opportunities on the world market.

What is driving these opportunities? The key factor is increased demand from the emerging economies. As people become more affluent, they consume more products that make use of milk. The increased demand for milk powders, for so long the sump of the industry, illustrates the fact that the major force underlying the price boom is increased demand for processed food ingredients.

Moreover, as demand expanded particularly in fast-growing Asian economies, exportable supplies were limited by drought in Australia and strong domestic consumption in the US and EU. The EU market is likely to be dominated by the expanding demand for cheese. Projections by the European Commission suggest that EU-27 cheese production is likely to increase by a total of 10 per cent during the 2005-13 period and will be likely to use nearly 85 per cent of the additional increase in milk expected to be delivered ober this period.

Can the price boom last? The OECD is relatively optimistic. Even though current exceptionally high prices are unlikely to be sustained, it is confident in its 2007 Agricultural Markets Report that milk powder and dairy product prices are likely to stay at relatively high levels at least until the middle of the next decade. Over the 2007-16 period it expects prices to remain at about US $50 to $100 per 100 kg (milk equivalent) higher as compared with the previous decade.

Compared to the level of average prices in nominal terms over the period 2001-5, world butter prices are preducted to increase the most, rising by 42 per cent. It wasn't so long ago that 'ageing' butter was being sold off from EU intervention stores to grateful Soviet consumers, a trade that made the intermediaries a lot of money. Skimmed milk powder prices are expected to rise by 33 per cent.

Much of the new output needed to meet demand will not come from the OECD area where production is expected to remain relatively stable, with the main production gains coming in Oceania and the United States. The OECD expects India, China and Pakistan to account for more than 50 per cent of the likely global milk production gains.

The one caveat is the quetion of economic growth. If economic growth continues at the rate predicted by the OECD, an average of 4 per cent for Asia, South America and Africa, then increased consumption and high prices will persist. Any faltering in growth would leave large quantities of milk from developing country producers looking for a market which would have a big knock on effect on the EU.

Why are British dairy farmers still in trouble? For historical reasons relating to imports from the British Commonwealth, the UK market is still dependent to a larger extent than elsewhere on the liquid market. This is still very price sensitive in the sense that supermarkets in practice treat milk as a 'loss leader' (whatever they might say to the contrary). However, they have been increasing prices to farmers recently, although input costs have also been going up.

Quotas are to be phased out, not before time, as they made it difficult for new entrants, despite special schemes in a number of countries. The UK in particular had insufficient quota to meet all its potential production needs. A freer market should benefit both producers and consumers.

Fischer Boel seduced by food security rhetoric

Experts on agricultural policy are often asked why the 'farm lobby' has been so successful although, of course, at EU level its influence has declined over time. In part this has been because it has been losing the debate and has often shown insufficient flexibility in responding to new framings of issues.

Nevertheless, one should never understimate the ability of producer interests to use new concerns to their advantage. In the past, for example, British farmers used concerns about the balance of payments to justify the subsidies they received. Food security concerns were significant during the formation of the CAP with recent experiences of food shortages in the minds of decision-makers. These concerns were reinforced by arguments about what might happen if the Cold War got a bit hotter.

With world supply and demand being tighter than it has been for some time, farming journalists and others have been trying to propel food security back on to the EU policy agenda. They appear to have scored at least a partial hit with farm commissioner Mariann Fischer Boel.

She said that Europe was producing enough to meet its own needs but had to keep one eye on growing demand around the world and discuss the question of 'food security'. 'It is obvious that the whole discussion on energy security started when suddenly the Russians cut off the pipelines. And it is obvious that we would want to think about food security. We can discuss buffer stocks just as you have for oil today.' EU rules require countries to keep three months' supply of oil in storage.

The analogy with energy security is an imperfect one as there is no one country with a pipeline of food on which Europe depends that it can turn off to great effect (although the moratorium on exports being operated by Russia and the Ukraine has had an impact on world prices).

Let's hope that just when we thought that intervention buying was fading away, it won't be rejuvenated as 'buffer stocks'. One of the greatest weaknesses of the CAP was always the creation of a risk free market through the purchase of surpluses by government agencies.

Giant energy plants to transform UK countryside

The British countryside will be transformed through the planting of tall energy crops, the BA Festival of Science in York heard yesterday. Fields planted with miscanthus (or elephant) grass, 3-4 metres high, will look like Caribbean sugar-cane plantations.

The Rural and Economy Land Use programme (RELU) estimates that 15-20 per cent of Britain's agricultural land may have to be devoted to growing biofuels to meet international obligations to reduce carbon emissions and improve energy security. [The writer is a grant holder in the RELU programme].

The two main candidate crops are willow coppice, harvested every three years, and miscanthus, a fast-growing Asian grass harvested annually in late winter or spring. Farmers would grow those on poor quality arable land, said Anglea Karp of Rothamsted Research, RELU energy crops coordinator. 'The impact on agricultural land and food production is a big concern,' she said. 'Because the energy crops recycle their own nutrients and do not need fertilisers, they will not need to be planted on the best agricultural land.'

RELU has attempted to assess the public acceptability of a landscape dominated by giant energy crops. They conducted a survey using photographs of existing miscanthus and willow plantations. Surprisingly, two-thirds said they would not mind the triffids growing within sight of their home, although this figure fell when participants were told that more local power stations would be needed to produce energy from their crops.

Environmental surveys are particularly suspect because people feel a need to give the 'correct' green answer. When it comes to behaviour, NIMBY attitudes come to the surface.

Nevertheless, RELU supremo Philip Lowe seized the occasion to urge the government to 'take a more strategic approach to land use in rural areas.' The well connected Newcastle University professor said the government needed a strategic vision for balancing the growing pressures on home-grown food supplies with the need to grow energy crops.

The good professor turned words into action when he bought bananas as a healthy energy boost for the participants waiting for my panel at York.

Sarko changes French stance on CAP

Observers like Jack Thurston have picked up signs of a change in the French stance on the CAP for some time. But now President Nicholas Sarkozy has promised to initiate a fundamental debate about its purpose next year when France takes over the EU's rotating presidency. Using words never used by a French president before to a farming audience, he told farmers at a cattle fair near Rennes that they had to learn to make a living from market prices rather than subsidies.

It's a change from the days when Jacques Chirac was de facto farm minister, but before we get too excited a reading of his speech suggests that he envisages the continuation of subsidies by other but more legitimate and acceptable means.

He framed a partly free market message with a demand for more EU wide protection for a sector he described as 'an essential pillar' of the French economy. The EU should set a goal of 'stabilising markets' in agricultural goods, one that, of course, it has had since the Treaty of Rome. It would do this by re-establishing the principle of 'community preference', although he did not spell out what this would mean in practice.

He said that a reformed CAP would need to meet four objectives: ensure food security for Europe (groan); contribute to a growing global demand for food; preserve rural economies and landscapes; and help combat climate change.

OECD blasts biofuel subsidies

Governments need to scrap subsidies for biofuels as the current rush to support alternative energy sources will lead to surging food prices and the potential destruction of natural habitats, argues the OECD in a report leaked this week. The OECD argues that politicians are rigging the market in favour of an untried technology that will have only limited impact on climate change. [The writer is a member of the BBSRC Biofuels Panel but the views expressed here are entirely his own].

The survey says that biofuel would cut energy-related emissions by 3 per cent at most. The study estimates the US alone spends $7bn a year helping make ethanol, with each tonne of carbon dioxide avoided costing more than $500. In the EU it can be almost ten times as much.

There could also be negative environmental externalities. The report states, 'As long as environmental values are not adeuately priced in the market, there will be powerful incentives to replace natural eco-systems such as forests, wetlands and pasture with dedicated bio-energy crops.'

The survey puts a question mark over the EU's plan to derive 10 per cent of transport fuel from plants by 2020. It says money saved from subsidies phasing out should fund research into so-called second generation fuels, which are being developed to use waste products.

Not surprisingly, the NFU has sought to play down the impact on food prices. Their energy and climate change adviser Jonathan Scarlock said, 'The current high prices of commodities are more down to harvest problems in key exporting countries rather than the relatively small proportion going into biofuel production.' While the price of cereals may have doubled this year, the impact on the retail price of food is likely to be about 5 per cent. However, bread prices in the UK have already gone up more than that.

There is a certain amount of triumphalism among farmers' spokespersons at the moment about the fact that the era of cheap food is over. They point out that the proportion of income spent on food in advanced countries has fallen dramatically.

That's so, but many families with young children are on very tight budgets and with fuel prices going up and nursery fees high have little room to absorb food price increases. They may trade down in product quality. Also, supermarkets operating in a competitive environment will try to hold back prices.

Special issue of Food Ethics

The autumn issue of Food Ethics focuses on EU farm policy. I wrote an introductory article and there are a number of interesting articles by academics and practitioners including Jack Thurston on where the subsidies go. You can read a sample of the material at Food Ethics

EU farmers need to save water

European agriculture should face the same 'user pays' principle as other EU consumers of water in the coming year in order to address the growing problem of water scarcity, according to a Commission Communication. The report by the Environment DG recognises that at least 20 per cent and maybe 40 per cent of water is wasted in the EU.

Climate change is likely to make drought a more frequent problem. Presenting the report Environment Commissioner Stavros Dinas pointed out that agriculture accounts for more water use than any other sector and as much as two-thirds in Southern Europe.

Supporting studies show that potential water savings resulting from improvements in the conveyance efficiency of irrigation systems range between 10 and 25 per cent of their withdrawals. Water savings resulting from improving application efficiency can range between 10 and 60 per cent of water use. Additional water savings can be expected from changes in irrigation practices (30 per cent), use of more drought-resistant crops (up to 50 per cent) or reuse of treated sewage effluent (10 per cent).

The potential water savings in the irrigation sector would amount to 43 per cent of the current agricultural volumes absorbed.

End protectionist biofuel barriers urges FAO chief

UN Food and Agricultural Organisation chief Jacques Diouf has urged the EU and US to lower protectionist barriers against ethanol imports to promote the development of biofuels in developing countries. They are often better suited to their production. Many analysts think that the environmental equation does not add up in the developed world for biofuels, quite apart from their likely impact on food prices.

At present, the bioenergy industry is regulated by domestic policies rather than international agreement. Diouf would like opportunities created for developing countries to take advantage of their comparative advantages in terms of ecosystems and climates that are more suited to biomass production, as well as ample reserves of land and labour.

The US, Europe and Brazil last year accounted for almost 95 per cent of the world's biofuel production with Canada, China and India produced most of the rest. Biofuel production, mostly of corn-derived ethanol in the US and rapeseed-derived biodiesel in Europe, doubled between 2000 and 2005, but still accounted for just 1 per cent of global road transport fuel. This is projected to rise to 4 per cent ny 2030.

At present rich countries' traiffs make it uneconomic for poor countries to grow biofuel crops. The problem for developing countries is exacerbated by food prices being pushed up by the biofuel industry's rising consumption of crops. Corn prices this year reached an 11-year high of $4.30 a bushel while wheat prices rose recently to $6.96 a bushel, the highest sive 1996.

Puzzle over co-decision

It is far from clear how agricultural issues will be dealt with under co-decision once the reform treaty is enacted. Under current rules, most CAP dossiers are decided under the 'consultation' procedure, where the Council must wait for an EP opinion, but has no obligation to incorporate EP amendments into the final text.

The reform treaty retains the text of the consitutional treaty which made a distinction between 'bigger' political issues, but consultation would remain for so-called 'technical' dossiers such as those 'relating to prices, customs duties, quotas and direct aids.' In practice, some of these could be very political. In any case, the distinction is a very fuzzy one and requires clarification if the system is to work.

The EP, although very attuned to issues like the environmental costs of pesticide use, has often not been a strong advocate of reform with its agriculture committee dominated by farm interests.

Glimmer of hope over Doha

International trade negotiations have been the most effective driver of CAP reform for over fiften years. I haven't commented on progress in the Doha Round for some time because prospects have looked so bleak since the collapse of the G-4 talks at Potsdam. But there does seem to be a glimmer of hope.

The Potsdam talks were ominously held at the Cecilienhof complex where the 1945 conference took place that carved up Europe after the end of the Second World War (I visited there when it was still in East Germany). This time it wasn't Stalin, Truman and Churchille/Attlee round the table, but the US, EU, India and Brazil: how the world has changed.

The talks broke up acrimoniously early after Brazilian Trade Minister Celso Amorin and his Indian counterpart Lamal Nath accused the US and EU of failing to live up to the commitment of a 'development round'. For their part the EU and US accused Brazil of inflexibility and even backtracking, particularly on tariffs for industrial goods.

On agriculture there were some signs of flexibility on the US side particularly in relation to trade distorting domestic support. There were also hints that the EU might be prepared to off bigger cuts for those products with tariffs over 90 per cent, although the EU insists that the discussion was more about the combination of tariff cuts and protection for so-called sensitive products.

Farm negotiations chair Crawford Falconer has tabled a draft document, but what it leaves open is the question of 'special product' provisions which permit developing countries to shield particular commodities from cuts in tariff agreements. They are a particular bugbear for the US who say they undercut liberalisation.

An agreement is not going to come anytime soon. Election pressures are increasing in the US and the next president may be elected on a protectionist platform, Hilary Clinton having seemingly abandoned her husband's commitment to free trade.

The dairy paradox

British dairy farmers are leaving the industry in large numbers, but world milk and milk product prices are heading upwards fast. How can one explain this paradox? The simple answer is, of course, that the key UK liquid milk market is largely insulated from world market factors.

Wholesale milk has doubled in price on world markets over the last year. One factor is the surging demand for milk products in China and the Middle East as diets change in respond to surging incomes. Drought problems in Australia which crippled the country's dairy output has raised the wholesale price of skimmed milk powder by 60 per cent over six months. This is an input widely used by the food processing industty and over year it has increased in price from $2,000 per tonne to $4,800.

The latest Milk Development Council survey shows that 16 per cent of dairy producers, some 3,000 in total, intend to quit. Of course, some of those may have been departures anyway given the lack of successors. It is also worth noting that they tend to be smaller producers, as the loss of 16 per cent of producers is assumed to produce a 7 per cent fall in output (although this in part depends how far larger producers increase output).

Campaigners for dairy farmers often state that many of them are not making a profit. These statements need to be treated with a little caution as generally accounts include family labour as a cost before profits are calculated. Nevertheless, the sector has been under pressure.

The decision by Tesco to pay 22p a litre for retail milk sets something of an industry standard and is a lifeline for producers. Views differ about whether it was the result of the Competition Commission's increasingly vigorous interest in Tesco or the outcome of campaigning by dairy farmers through the NFU and other bodies. However, milk used for other products like cheese and butter generally yields a poorer return.

Some of this is feeding through into consumer prices. The home delivered pint at 48p per litre is likely to go up by a penny at most, but within the past year, the supermarket price of a pint of double cream has gone up from 91p to £1.12p, an increase of almost a quarter. Processed foods and cheese are likely to see a substantial impact, while Domino's Pizza is forecasting a 30 per cent rise in the cost of its products due to cheese price increases. Chocolate manufacturers have also taken a hit, although that has often been felt more in terms of a profits squeeze than by consumers.

Export refunds for dairy products have now been phased out which is a significant gain given they were at a level of €3.01bn in 1988 and even amounted to €725m last year. They could be reinstated if the market falls, but it is currently so buoyant that the Commission is talking of reducing the meetings of the Dairy Management Committee from twice to once a month. If export refunds remain at zero, EU spending in the dairy sector would be lower than revenue from superlevy, making the sector self-financing.

The Commission is determined to phase out dairy quotas by 2015, although discussion of how to achieve a 'soft landing' continues. There have been expressions of concern from economically marginal but politically influential dairy areas like Bavaria. One solution could be to use a 'national envelope' device to provide assistance.

The EU has historically had a structural surplus of milk, while Britain has not been self-sufficient because of its historical reliance on imported dairy products from the Commonwealth. A more market oriented system should benefit larger scale UK producers, who are among the most efficient in Europe, but pressure on smaller, more marginal and more peripheral farms would continue.

Horse paddocks get SFP

In the long run it is going to be difficult to justify a Single Farm Payment (SFP) model that is based on historical receipts. This model originated in the generous compensation given to cereal farmers for cuts in intervention payments in the 1992 MacSharry reforms. There will be a shift to a regional model with a flat rate payment per hectare in each region. This is already under way in England, Finland and Germany and all the new member states have a flat rate payment system.

However, those member states that have introduced a regional model have seen applications for CAP support rocket, e.g., on horse paddocks which are a popular use of land near any centre of population. These claims are frequently for small amounts, e.g., €50 - €100, but the high number of applications - 40,000 in England and 20,000 in Denmark - imposes considerable transaction costs.

It is likely that the Health Check will look at introducing some form of lower threshold for SFP funding, such as a minimum amount or raising the current 0.3 ha minimum area requirement for applications.

Corridor politics secure fruit and veg deal

The fruit and vegetable reform agreement is another step on the road to a more market oriented CAP. Yet in some ways it is more significant in terms of how it was secured and what it reveals about decision-making in an EU with 27 member states.

Despite fears of a marthon session, agreement was reached by 5 p.m. in the afternoon. This was done by conversations in the corridor rather than in plenary session of the Council. This reflects the way in which deals are increasingly being reached in the Special Committee on Agriculture or in the margins of the Council itself - over lunch or in the corridor. This has always happened to some extent, but it is more necessary in a much enlarged EU.

The existing system of processing aids for tomatoes (€329m), citrus fruit (€241m) and peaches/pears/prunes/figs (€76m) based on production and an area based scheme for dried grapes (€115m) will cease this year. The funds received by each member state will be added to the national envelope for the SFP. However, a 'coupled' aid for tomatoes can be retained by member states for four years.

Various side payments had to be made to secure the deal. Spain and Italy will get a one-off national aid of €15m in 2007/8 to help the tomato processing sector. The reference period for Greece was adjusted because of a poor peach crop in 2004, effectively giving Greece an extra €3.1m in its envelope. There will be some transitional direct payments for soft fruit on new member states, although in the case of Latvia this amounts to just €92,000. But by such adjustments deals are made.

Productionists unite under food security banner

A number of producer interests would like to revive food security as a major driver of agricultural policy. Organisations like the Commercial Farmers Group (CFG) in the UK, a small grouping of leading producers, argue that new threats are present in the form of population growth, pandemic diseases, climate change, terrorist actions and increased demand for renewable fuels. They want to change the balance between the environmental and food safety concerns that have been driving agricultural policy in recent years and return to more traditional productionist priorities.

Hence, the NFU in England argues that ‘Food security concerns … need to play a role in the design of any future agricultural policy. Similarly, the Country Land and Business Association (CLA) argue ‘that security of food supplies should be a strategic priority.' The CLA’s chief economist, Alan Buckwell, has been trailing the idea of a European Food and Environment Security Policy which would seek the ‘socially optimal’ production of high quality food, energy, biodiversity and landscape. This is undoubtedly an ingenious way of placing old ideas in a new wrapper.

The CFG takes the view that ‘80% of the food consumed nationally should be from the UK’. This revival of old style economic planning targets is too much for the NFU who stressed, in line with government thinking, ‘that food security was not the same as self-sufficiency and the union did not want to see the government set strict targets on food production or intervene in the market.’

What the NFU envisages is an ‘early warning system’ in which indicators such as the UK’s share of EU production in different sectors would be used. When that fell by a given amount, there would be an investigation by a joint industry/government panel. This would then presumably undertake measures to ‘safeguard the productive capacity of UK farming', although how this would be compatible with EU state aids policy or WTO rules remains unexplained.

Farmers' Weekly columist David Richardson, an unabashed defender of productionist values, has argued that the early warning committee should be set up as an equivalent of the Bank of England Monetary Committee. Of course, one difference is that the experts on the Bank of England do not have a substantial direct personal interest in the decisions made as farmers and their allies would.

Productionist lobbyists have tried to borrow discourses about energy security, claiming that if government can pay attention to energy security it can also move food security up the political agenda. However, oil and gas supplies are more reliant on a small number of potentially unstable countries than food supplies. This argument also overlooks the increasing global integration of food production. Nevertheless, the food security discourse is a powerful one and there are those who consider that it could be used as a basis for a productionist turn in policy.

Boom in Borage?

Walking the fields near my home, I noticed a new blue starflower crop that I was not familiar with. Indeed, the crop has suddenly become one of choice throughout this part of Warwickshire.

A little research established that it was Borage, a high value, speciality oil crop. Similar to Evening Primrose, Borage is recognised as a key source of gamme-linoclenic acid (GLA) and is used, when marketed as Starflower Oil, as a health food supplement or in skin care creams. GLA is known to have anti-inflammatory properties, without causing side-effevts often encountered by other inflammatory drugs.

Borage was first grown as a field crop in the UK in 1983, mainly in East Anglia. During the 1990s the crop area increased significantly. It has agronomy advantages as it is a good break crop in arable rotations. It's a low input crop with minimal environmental impact, not normally needing pesticides and requiring low inputs of nitrogen.

Under the single farm payment regime, farmers can be more ambitious about growing different crops as they do not need to sell into intervention to obtain subsidy payments. The contract price for borage is currently around £2,000 per tonne and ex farm gross margins of £630 per hectare are achievable. A number of companies in the UK offer 'buy back' contracts and agronomy support.

If grown specifically for the pharmaceutical industry, Borage can be grown on set aside land, but as the majority is grown as a food supplement this is not generally possible. However, set aside looks like it is on its way out with the increasing amount of land devoted to biofuels.

The spread of Borage into Warwickshire suggests that to an extent the policy instruments of the new look CAP are working. Of course, it also means less land devoted to conventional food crops, pushing up their price. But, in principle, it should mean that farmers get better returns from the market and have less need of subsidy.

Are biofuels to blame for agflation?

The UK's consumer prices index showed annual food price inflation of 6 per cent in April, the highest level in almost six years and well ahead of overall inflation of 2.8 per cent. In the US, prices have risen by 6.7 per cent, seasonally adjusted, since the beginning of the year, compared to 2.1 per cent for all of 2006.

There are some proximate factors driving food prices. Florida promises the smallest orange crop in 17 years. Swine fever in China has pushed up local pork prices. Coffee prices have been pushed up by adverse weather affecting production in Vietnam and Brazil, the two largest producers.

Of course, the relationship between food prices and inflation in general has been weakening. In the late 1940s food accounted for 43 per cent of the US consumer price index. By 1975 it was down to a quarter and its weight in the basket is now just 14 per cent.

Biofuels are gradually taking over as the main growth driver of agricultiral demand, Goldman Sachs says that if government policies are adopted in full, global demand for biofuels could increase from 10bn gallons a year to 25bn gallons by 2010. In the US ethanol production accounted last year for 16 per cent of the corn (maize) crop. If farmers are to fill cars as well as stomachs, then there is an argument for structurally higher prices of some agricultural commodities.

Of course, one response in a market system is to increase production, although this is ultimately limited by the availability of suitable land. Indeed, global grain production will rise by 6.2 per cent to a record 1.666bn tonnes in 2007-08, according to the International Grains Council. However, this will not match global consumption forecast at 1.680bn tonnes.

China's Communist rulers are worried and have announced a moratorium on the production of ethanol from corn and other food crops. In China grain security has been at the top of the party's political priority list and a 43 per cent increase in the price of China's staple meat - pork - triggered concern at the highest levels of the party.

The European Commission argues that its 10 per cent 2010 target for biofuels will not put a great strain on food markets. Their analysis suggests that prices for agricultural raw materials in the EU would rise by 3-6 per cent for cerals and 5-18 per cent for the major oilseeds as a result. As the cost of cereals makes up only 1 to 5 per cent of the consumer price of bread, which means that bread prices would increase by less than 1 per cent.

Although concerns have been expressed that planting biofuel crops may contribute to deforestation, biofuels do have clear environmental benefits. Corn-based ethanol gives 35 per cent more energy than it takes to produce. Greenhouse gas emissions per gallon of fuel used are 18 to 29 per cent lower with ethanol than with fossil fuels.

Biofuels are politically popular in the States because they give an income boost for farmers in the electorally marginal Mid West and also seek to address the country's security concerns about energy dependence on the Middle East. President Bush wants the country to produce 35 billion gallons of corn-based ethanol, a goal that will require an additional 129,000 square miles of farmland, an area the size of Kansas and Iowa combined.

What are implications for the CAP? In an ideal world, the promise of improved market returns should mean that farmers, particularly big grain farmers, would have less need of subsidy. Farmers would no doubt argue that they are recovering from a long period of low incomes and that indeed their real incomes has been falling for a century (although in practice this is offset by much larger scale operations that secure economies of scale).

A real concern is that the rush to biofuels will boost food security discourses. These are seen as the best bet by those who want to return to discredited productionist orthodoxies and to make the claim that farming cannot function as a normal commercial activity but should be subsidised.

New French farm minister is not good news

French farm minister Christine Lagarade only lasted a month in the job before being promoted to finance minister and her successor, Michel Barnier, is not good news if you are a reformist.

He said on Tuesday that his experience as a European Commissioner could help him defend the interests of French farmers within the EU and on a global level. The 56-year old is familiar with the workings of the European Union from his time as commissioner for regional policy and institutional reform from 1999-2004, when he managed the second largest EU budget after agriculture. He was also French foreign minister from 2004 to 2005, but was replaced after French votes rejected the EU constitution in a referendum.

'I will say now what I have always said when I was foreign minister: the common agricultural policy is not an archaic policy. It's modern,' he told RTL radio. So French farmers have nothing to fear, but the rest of us do.

Sarkozy is basically a conservative (he is certainly not a liberal) and he has more important agenda items than agriculture where basically his strategy seems to be not to offend the powerful French farmers lobby.

When I was in Paris, one questioner when I gave my paper suggested that the SFP was deliberately introduced to give a more transparent instrument that would draw public attention to the payments made to big farmers. I do not think the reformist camp was that smart.

In any case, actually getting hold of this information and publishing it is quite difficult as is evident from Jack Thurston's blog at Farm Subsidies Four countries have declined to supply the information and for most member states, including the UK, only partial information is available.

COPA to smarten up its act

Casual explanations of the persistence of the CAP put it down to the strength of the 'farm lobby'. At a national level, there is some truth in this and the positions of member states in the Farm Council often reflect pressure from their domestic farmers' organisations. After all, upsetting them is likely to lead to a lot of trouble and very few plaudits.

However, the European farm level organisation, COPA, has been a shadow of its former self for some time. It was originally set up at the instigation of the Commission and had a close relationship with them through to the 1970s. But since then its influence has faded. This partly reflects a failure to grasp the extent to which the agenda on the CAP, and the acceptable justifications for subsidies, has been changing.

There have been a number of internal reviews of COPA, but the latest one opens up the prospect of change. According to new Secretary-General Pekka Psonen with the EU now having 27 member states, COPA cannot afford to be hostage to any single organisation. Hence, it looks likely that the current unanimity rule will be scrapped and replaced by a system of qualified majority voting.

Will COPA's thinking also be dragged into the 21st century? We shall have to wait and see.

Sarko's hard line could have a paradoxical end

The hard line being taken by France's new president, Nicolas Sarkozy, on the future of the CAP could have a paradoxical outcome: further re-nationalisation of the policy once seen as the cornerstone of the European Union.

Sarkozy has revived the notion of 'communiy preference', a term dating back to the 1950s which referred to favouring domestically produced goods over imports. The Commission's off the record reaction was 'That would be going back to the CAP of 20 years ago.'

The upcoming health check of the CAP will present some challenges for French policy. Farm Commissioner Mariann Fischer Boel wants aid to farmers to be fully decoupled from production, but France has been one of the most enthusiastic users of options for 'recoupling'. She is also thought to think that intervention purchasing should only be an emergency option.

In the longer run, Budget Commissioner Dalia Grybauskaite is said to favour a radical overhaul of the EU budget after 2013 with a major shift in spending away from farm support towards growth and competitiveness-related spending.

France will become a net contributor to the CAP after 2013. French centre-right MEP Alain Lamassoure, who has been advising Sarkozy on EU affairs, has published proposals which would see greater co-financing of support by national governments. This is not favoured in the Commission as a potential distortion of competition which would undermine the common character of the CAP.

Yet if the EU decides on cuts that are too radical for Sarkozy, or at any rate for domestic French opinion, the solution could be to pay subsidies to French farmers from national funds. Thus, the final outcome could be even more re-nationalisation of the CAP than that which arose from the compromises of the 2003 reform.

I shall be presenting a paper on the CAP in Paris on Thursday and it will be interesting to see what the state of French opinion is.

Water is not just an issue for Australia

Dry irrigation channel near Griffith, New South Wales

The long drought in Australia has now given way to serious floods in New South Wales. Apart from the fact that Australia is a competitor with the EU, what is the relevance for the CAP? With increasing evidence of global warming, the effective use of water is an issue that concerns everyone in the world. Adequate supplies of water for intensive agriculture are an increasing problem in many parts of Southern Europe and water abstraction for water intensive crops is an issue in many parts of southern and eastern England.

A few years ago I visited the town of Griffth, NSW. which is at the heart of an irrigation district in the Murray-Darling basin in an area known as the 'Riverina'. It is sometimes referred to as Australia's version of California's Sacramento Valley. The basin as a whole accounts for some 40 per cent of Australia's agriculture and 85 per cent of its irrigation.

My notes at the time stated, 'We visited an irrigated farm producing rice as well as wheat and canola. In the last year farms have only been permitted 38 per cent of their normal water extraction. The amount of water needed to produce rice has been reduced from around 16 mega litres a hectare to around 11, but this still leaves it as a very water intensive crop.'

Australian rice farmers lead the world in water conservation. Their water use per tonne of output is half the global average. But in the last growing season there was no water for the rice farmers around Griffith.


How it should look: irrigation channels at work

Droughts are nothing new in the Murray Darling because of the periodic El Nino weather pattern. However, irrigators were allowing too much water to be taken out of the Murray-Darling. By 1994 human activity was consuming 77 per cent of the river's average annual flow, even though the actual flow falls far below the average in dry years. The mouth of the river was beginning to silt up. Thanks to a combination of reduced flow and increased run-off from saline soils churned up by agriculture, the water was becoming increasingly salty.

Australia has a fragile ecology that supports a bewildering and amazing biodiversity. It is also the world's biggest exporter of 'virtual water' embedded in farm produce. Just 0.5 per cent of Australian farming is artificially watered, but it produces 23 per cent of agricultural output.

Economists argue that it would make sense for farmers to sell water from their allocations to cities, given that the average price of urban water is $A1000 per megalitre whereas farmers trade water between themselves at $A100 a megalitre in drought years. Politics also comes into it as the farmers generally support the National Party, Prime Minister Howard's junior coalition partner.

The reduction in the availability of Australian produce is one factor producing higher food bills across the world. This year's wine grape harvest has fallen by 30 per cent, the equivalent of 400 million litres. This has eased the wine glut that was hitting Australian producers, but means the end of the cut-throat discounting of the last two years.

And if a country as economically strong and politically robust as Australia has difficulties sorting out its farm water problems, what does that imply for the rest of the world?

Is there hope in France?

Christine Lagarde

After Nicholas Sarkozy appeared to indicate that it was 'business as usual' in French agricultural policy, the appointment of Christine Lagarde as farm minister gives a ray of hope. Named as the 30th most powerful woman in the world by Forbes in 2006, she was formerly trade minister.

She was formerly chief of a big American law firm. Although she has been careful to say that agriculture would continue to have a 'strategic' role, Ms Lagarde also said that France could continue its position of 'intransigence' for ever.

Perhaps she can use her skills as a synchronised swimming champion to move the debate on CAP forward.

Wine reform will lead to job losses

The competition: a vineyard in Chile

An impact assessment of the European Commission's proposed reforms to the CAP wine regime warns that job losses are inevitable in parts of Europe most responsible for the distillation of wine. The report quotes Italian organisations, not an entirely disinterested source, that the sector could lose 75 per centr of its jobs in Italy.

Reform is also expected to bring down the price of cheaper table wines as wine that would, under the old regime, have been distilled is instead bottled for sale (with binge drinkers in Britain being one possible market). However, specialised table wine producers in Sicily and Languedoc-Roussillion in France could see their income fall by up to a third. Enraged wine makers in Languedoc-Roussillion started fires in several French supermarkets to protest against the reform.

However, CEEV, the European wine producers' federation said that changes in the industry were inevitable in the face of growing globalisation. 'This may be the last chance we have to update the sector', warned José-Ramón Fernandez. 'We welcome the Commission's efforts as long as they are accompanied by measures to move into alternative agricultural sectors that are socially acceptable to producers.'

A Commission spokesman said that the changes were likely to mean less but better wine on the market in the short term, but in the long-term a more competitive market, together with simplified labelling and classification rules, could see production soar. 'In the long-term people around the world could be drinking French and Spanish and Italian wine, instead of New World varieties.'

Perhaps. But New World producers know that the market has changed, with a mass market less interested in provenance and more in having drinkable wines available at an affordable price. In the short run, Australian production could be hit by the country's chronic drought, a topic we hope to cover soon

Plus ça change, plus c'est la même chose

France's new president Nicolas Sarkozy has aligned himself firmly with traditional French thinking on the CAP. He warned that he expected the EU to take a much tougher stance in global trade talks and said that he would not allow his country's farmers to be sold 'at the lowest possible price.'

He said that he would not allow cuts in support for European farmers while their US counterparts benefited from the same policies. Trade offs did not interest him: 'I'm not going to sell agriculture to get a better opening for services.' Mr Sarkozy said he as not going to be 'boxed in' if others failed to make reciprocal offers.

With the Doha Round talks seemingly making little real progress, Mr Sarkozy has dashed hopes that he might to talk a more flexible approach to cutting EU farm tariffs than his predecessor.

Scrap CAP says Commons committee

The Common Agricultural Policy should be scrapped and replaced with a new rural policy for the European Union says the House of Commons Select Committee on Environment, Food and Rural Affairs. The report is a response to the Government's 'Vision for the Common Agricultural Policy' published in December 2005. I appeared before the committee: further details of the report can be found at: CAP

The report states, 'The objectives of the CAP have remained unchanged for the last 50 years and now an anachronism. For all its revolutionary rhetoric, the UK Government's "Vision for the Common Agricultural Policy" was ultimately a disappointing lost opportunity as it merely described an evolution of the existing policy, primarily motivated by budget savings, rather than presenting a truly revolutionary vision.'

I was critical of the Government's strategy and tactics in launching the Vision document. The report comments, 'The Government showed a naivety in believing that its Vision document could be its catalyst to a reform agenda when it was introduced so near to the end of its Presidency and without any programme in place to gain support for the British position. For British ideas to succeed, it is important that the UK adopts a more sophisticated approach to its agenda than when it launched its Vision document on an unsuspecting audience and without prior effort to prepare other farm ministers for its arrival.'

It further notes, 'Not only did this approach subsequently damage its prospects for Pillar 2 development, it may well have undermined the UK Government's ability to infuence the reform agenda in the future by antagonising the European Commission and the other EU member states.'

The report talks favourably of the idea of a bond scheme, but notes Commissioner Fischer Boel's argument that it would lead to the demise of cross-compliance. However, the bond is intended to replace and phase out SFP payments. Separate payments could still be made for public good provision by farmers linked to cross compliance.

The report is perhaps too optimistic about the forthcoming CAP 'health check' offering a means of moving the debate forward given the narrow way in which its purpose has been defined by Commissioner Fischer Boel.

Wine lake threatens to overflow

Chilean 'reserve' wine in oak barrels - see story below

A tabloid newspaper once asked me if I could help them with a stunt whereby a journalist in a boat would row on the wine lake. Needless to say, the wine lake does not exist in a form that lends itself to such an enterprise. Nevertheless, the crisis of surplus wine stocks in Europe is such that the lake metaphorically threatens to overflow.

The Commission's proposed reform measures would not have eliminated the problem, but now their effectiveness is going to be further diminished by dilution at the insistence of wine producing states like France, Italy and Spain, aided and abetted by wine producers among accession states such as Bulgaria and Romania.

The fundamental facts are these: Europeans are drinking less wine (consumption is declining by 0.65 per cent a year) and they are drinking more 'New World' wines from Australia, California, Chile etc. Exports are also declining, so that ten years ago the EU held mpre than 80 per cent of the world wine market and its current share is 65 per cent. Moreover, the accession of Bulgaria and Romania has pushed up production by some 7 million hectolitres.

The structural surplus in the wine market in a 'normal' year is around 12.8 million hectolitres and this does not include the amount distilled for industrial use. The EU is currently spending €1.269m a year on the wine regime, about forty per cent of that being spent on distillation.

Policy instruments have not worked well. The ban on new plantings has not controlled production because yields have increased in some member states and there have also been illegal plantings. The grubbing up scheme has virtually ceased to operate.

Wine is a very conservative industry in Europe and the rigid rules on labelling and wine-making practices hinder innovation. When I visited a Chilean winery last year, they told me that they had two types of wine, standard and reserve, the latter being matured in oak barrels.

Attempts to promote the idea of Geograohic Indications are making little headway anyway, but are not helped in the case if wine by the dichotomy between table wines and 'quality' wines produced in specified regions.

The Commission's original proposal envisgaed getting rid of about 12 per cent of the current area of vineyards. This would not have eliminated the surplus in a declining market, but it now looks likely that the grubbing up programme will be halved.

It is disappointing that the European Parliament has taken a hostile approach to the Commission's proposals. Particular interests have prevailed over more general ones. However, the wine sector itself needs to become more competitive otherwise it will suffer more in the long run.

Sugar reform hits trouble

Last year's sugar reform has hit trouble and it's a familiar story: too much sugar is still being produced in the EU. 2007 production plans show that quotas have only fallen by 2.2 million tonnes over the first two years, well below the 5-6 million tonne target.

Moreover, the new rules also allow most sugar producers to purchase limited quantities of extra quota at €730 per tonne, and many companies who believe that their long-term future is promising have taken up this option, with nearly 900,000 tonnes of extra quota having been bought. In all, therefore quotas have only fallen by a net total of just over 1 million tonnes. Only three countries have ceased production altogether: Ireland, Latvia and Slovenia.

The quota system, together with high support prices, has not only built in large surplus production, but has left no room for imports. The commitment to import sugar from the ACP countries is being replaced over a transition period by quota free imports from the least developed countries and eventually from the ACP countries. The prices set in the EU will still be well above current world market levels even at the end of the reform process and the EU market is likely to be attractive to many producers in the developing world where the option for growing alternative crops is limited.

The reform cut sugar sale prices by 36 per cent over four years and set up a restructuring fund to pay uncompetitive processors and farmers to close down. Factories could choose between competing for sales at the new price, or being paid to cut their production quotas. According to the Commission, sugar facories were reluctant to reduce quotas because it was unclear how much of the restructuring aid they would have to pass on to sugar farmers. The reform gave farmers the right to at least ten per cent of the aid but member states could decide to hand out more.

The Commission is concerned that processors have been discouraged from taking up restructruring as they have been offered too small a proportion of the payment, particularly in the new member states where take up of restructuring money has been much lower than expected. The Commission plans to allow producers to keep 90 per cent of the restructuring money, with the remainder passed on to farmers. In any event, the world sugar market is very volatile and likely to become more so now that the EU has virtually disappeared from world trade.

Commission waters down wine reform

The Commission has backed away from radical plans to reform Europe's perenially troubled wine sector in the face of opposition from member states. The proposals put forward last June offered EU winemakers €2.4 billion over five years as an incentive to dig up their vines and concentrate on producing quality wines.

In particular the vineyard removal scheme will be much less extensive than originally proposed. The target for grubbing up vines, originally set at 400,000 of the current 3.4 million hectares, looks set to be cut in half. In any case, the scheme would continue to be voluntary for producers with no one forced to tear up vines.

All vine-covered land is planned to become eligible for Single Farm Payment to secure the 'Green Box' status of these aids in any future WTO dispue.

The Commission's plans have encountered opposition from some member states, not least Germany who are upset by a plan to ban the use of sugar. German farm minister Horst Seehofer claimed that Germany would lose part of its competitiveness 'if we did without sugar unnecessarily.' A ban on adding sugar would increase the cost of producing wine in Germany by up to 25 per cent. However, Commission officials argue that half of quality German wines are already produced without using sugar.

Accession states face surplus stocks fines

The Commission has announced that all of the 2004 accession states except Hungary will have to pay for failing to stop speculators building up stocks and benefitting from selling them at EU prices. The issue has caused alarm in the new member states who claim that in many cases the build up of stocks was due to hoarding by citizens rather than any profiteering by commercial traders. This was the excuse used by Estonia to explain what would have been huge sugar stocks per household, the argument being that Estonians were preparing for an orgy of jam making which was claimed to be an historic national pasttime.

Poland will have to pay €12.5m for surplus meat stocks, the Czech Republic €12.3m for excess meat and fruit stocks and Estonia €7.6m for milk. However, the relatively poor accession states will be given time to pay with instalments spread out over four years.

Butter mountain finally melts

The satisfied look of this cow in the Azores is no great surprise as it receives one of the biggest cattle subsidies in the EU, although still not enough for Portugal who voted against the last CAP reform on the issue of the fate of dairy cows in the Atlantic islands.

After 39 years of a butter mountain under the CAP, it has finally melted away. When the Soviet Union still existed, stocks of 'ageing' butter used to be sold off to its consumers who were glad to get any butter at all.

The last remaining stocks (in the Czech Republic, Finland and Spain) have been sold off. High market prices have led the Commission to close intervention in Spain, so it only remains open in Portugal.

Stocks reached a peak in 1986 when stocks totalled no less than 1.283 million tonnes, but the imposition of milk quotas helped to curb the build up. The other form of intervention buying in the dairy market, that of skimmed milk powder, ended in 2006.

Dairy intervention arrangements could be abolished as part of the forthcoming Health Check review. Dairy farmers still receive support, however, even though they might like to pretend otherwise. The virtual cow that was launched at the end of the 1990s never made its way into legislation, but dairy farmers receive their payments in another form.

Oxfam has estimated that a dairy cow in the EU can receive a subsidy of as much as $2 a day. Even if this figure is exaggerated, it is more than many people live on in least developed countries.

'We're all doomed'

Norfolk farmer David Richardson writes a weekly column in Farmers Weekly. The magazine has recently undergone a revamp under a woman editor, but David Richardson's column has survived, no doubt because he is seen as an articulate spokesperson for the 'big' farmer.

I met David Richardson once and he is undoubtedly a pleasant and sincere guy who defends his corner as best he can. But it's a pretty unreconstructed corner. Any argument will do to defend protection and subsidies for British farmers. Food security has always been a favourite theme of his in recent years. Defra is, of course, either hostile or ignorant to farmers, unlike good old MAFF. Anyone who fails to buy British food (unless it is a tropical crop) is close to being a traitor, while Global South farmers shouldn't be allowed to export to Britain because their animal welfare standards don't match those in one of the richest countries in the world.

In one of his most recent columns, Richardson claims 'subsidies - particularly the SFP element- are going to be phased out over the next few years.' I've heard a distinguished official at a farming organisation taking a similar line. And I've even heard a similar line taken by experienced BBC journalists who should know better.

Now it's more than likely that the 'financial discipline' will reduce SFP between now and 2013 because of the accession of Bulgaria and Romania but only by probably about seven per cent. Given that Mr Richardson, by his own admission, derives some twenty per cent of his farm income from SFP (and more from other payments), he should still be safe for nineteen per cent.

It's likely that SFP will be reduced further after 2013 but it is unlikely to disappear altogether.

So why are the likes of Mr Richardson making such claims which are remnsicent of the famous line favoured by one character in the old British sitcom Dad's Army, 'we're all doomed'? I would suggest because if such claims are made long enough and loud enough, the public will believe that subsidies are not being paid any more.

It has been claimed that the public is becoming more sympathetic to 'supporting' British farmers, although why a commercial activity should need supporting (other than for the public goods it provides) is not clear. But a mixture of ignorance (about the true cost), sentiment (about the countryside) and nationalism (about food security) can provide a heady mix in support of the status quo.

Fruit and veg reform could bring health benefits

Seeing through the Commission's proposal for reform of the fruit and vegetable regime could bring health benefits. With the exception of Greece and Italy no EU member state is currently meeting the World Health Organisation's recommended consumption rate of 400kg per day per capita. From the viewpoint of Commission officials, getting consumption up to the WHO minimum level would also provide a commercial answer to the sector's marketing problems.

Fruit and vegetable markets are very susceptible to short-term supply and demand crises. These result from both the perishable nature of the product and the susceptibility of both production and consumption to weather conditions. It is hard to underestimate how weather sensitive demand for these product is.

The Commission favours 'Producer Organisations' operating their own 'crisis management' schemes. This is a rather old style 'corporatist' solution which is handicapped by the fact that such organisations do not exist in all member states. In the Netherlands with its extensive glasshouse production sector, 79 per cent of growers are in such organisations. Membership in some accession states is particularly low: 1 per cent in Poland, 3 per cent in Cyprus and 4 per cent in Hungary.

However, some member states have still been upset by the Commission's far from radical proposals. They are particularly opposed to the idea that 20 per cent of an organisation's budget should go on environmental measures and that no more than 30 per cent should be spent on crisis management.

The UK uses a retailer led system of category management with a limited number of suppliers to each retailer, although a supplier may organise several growers. I am currently engaged in two research projects related to the horticulture sector and it has to be admitted that this system does produce greater concentration of ownership and production with retailers able to delist suppliers with little warning. However, the solution to those problems might lie in a more robust application of competition policy, something to be discussed in a future post on the dairy sector.

One Vision, Two Steps

It sounds like a Maoist slogan, but farm commissioner Mariann Fische Boel set out a 'one vision, two steps' plan for the reform of the CAP at the recent Agra Europe conference in London. As she has made clear before, the forthcoming Health Check which will address the period up until 2013 is seen largely as a tidying up exercise rather than an opportunity for further fundamental reform. The Commission is currenly preparing a Green Paper on the Health Check but this is not expected to be ready until after the summer.

However, a substantial shift in the structure of EU financing for agriculture and the rural economy remains a distinct possibility for the period after 2013. In the meantime, Single Farm Payment payments could be cut by 7 per cent a year by 2013 under the Financial Discipline Mechanism. This would result from the continuing phasing in of direct aids to accession states, aggravated by the addition of Bulgaria and Romania which took the SPS payment budget beyond the Pillar 1 budget ceiling. However, Fischer Boel confirmed that the SPS 'will be with us for a long time to come.'

The Danish farm supremo had little time for the two main drivers of CAP reform. She said that 'Thinking about policy must drive the European budget. If we put things the other way round ... we won't have a CAP that can meet the very real challenges of the futuree.' She also declared that she would not allow the Doha Round of international trade talks be 'the main driver of our domestic policy for farms and rural areas in the years ahead.'

In short, Fischer Boel wants to continue the reform process, but she wants to retain a CAP a long time into the future. And, of course, doing the first task makes it easier to achieve the second.

Sea of ignorance

A new Eurobarometer survey has found that 72 per cent of respondents considered themselves to be uninformed on agricultural issues and over half (54 per cent) had never heard or read about the CAP. The 43 per cent who claim to have at least some degree of awareness comprises of 34 per cent who say 'they don't really know exactly what it is' and just 9 per cent who say they know 'exactly what it is'.

Not surprisingly, the highest level of awareness is found in France, where almost two-thirds (64 per cent) have heard of the CAP and nearly one in five (19 per cent) are exactly aware. There is also high awareness in two other beneficiary member states, Ireland (61 per cent, 16 per cent exactly aware) and Poland (60 per cent, 10 per cent exactly aware).

Having been told that 40 per cent of the overall EU budget is spent on agriculture, only 16 per cent thought this was too high and almost 6 in 10 thought that this share should stay the same or increase in coming years. But then presumably if one told some respondents that 40 per cent of the EU budget went on supporting small shopkeepers, one might get a similar pattern of answers.

Those questioned (41 per cent) thought that ensuring the health and safety of food products should be the main priority of the CAP and one might question how far that forms part of the policy.

In between public ignorance and concentrated interests seeking to defend the CAP, it's difficult to find a space in which reformists can insert themselves.

It's nice to have it confirmed

Maurice Faure is the last surviving signatory of the Treaty of Rome. So it's nice to have his confirmation that the Treaty, whose agricultural clauses have never been modernised, was a great deal for farmers.

Faure told the Financial Times, 'The Treaty of Rome was very favourable to farmers.' The new arrangements offering subsidies and markets for France's grain and sugar beet surpluses were 'a big concession by Germany.'

Abolish CAP subsidies

An interesting new blog on this theme here (and a good debate going on in the comments section):
Subsidies

New market develops in farm subsidies

Given that milk quota has been actively traded in the UK, producing so-called 'sofa milkers', it should come as no surprise that Single Farm Payments are now being bought and sold. Agricultural brokers WebbPaton did fifteen deals in one day recently. The market has been described as 'ferocious' with rights to subsidies 'flying off the shelf'. There's an element of risk, but an investor could receive one-third of the original investment back each year.

When the single farm payment was set up, farmers were given the right to trade subsidy entitlements between themselves which makes sense as it allows individual farmers to adjust their own businesses in the light of their assessment of market conditions. Farmers started trading among themselves, but the profitability brought in a wider range of investors. Open auctions are being held, while other investors are buying rights to subsidies over the telephone through brokers or on internet sites. You can find out more at WebbPaton's web site: Entitlement

You have to be classified as a farmer to receive subsidies, but you only need hold a lease on a minimum of 1.7 acres for ten months of the year and never have to visit it. Scottish landowners are now renting out tracts of rocky highland for as little as £5 an acre per year.

The market that has developed does enable farmers to raise funds to retire or to invest in their business. But that could have been achieved by converting subsidies into a marketable interest bearing bond which is what many analysts advocated.

So, goodbye then, President Chirac

The announcement that he will be stepping down as French President by Jacques Chirac reminds us that for a long time France has had a head of state and government who has also seen himself as Minister of Agriculture. Two of his last public appearances were at the Paris agricultural show and a European summit in Brussels, the site of his many battles in defence of French farming subsidies. Chirac owns a cheteau in the Massif Central which is one of the poorest and most sparsely populated rural areas of France.

The Financial Times commented, 'His near-umbilical attachment to the country's farmers throughout his career, which included a spell as agriculture minister, means he can at least count on them to be saddened that the Chirac era is coming to an end.'

Whether any of his possible replacements will take a different view of the French national interest remains to be seen.

Three options for the future of the CAP

The chief economist of the CLA, Allan Buckwell, has been an academic and has worked for the Commission as well as for the landowners' organisation, so what he has to say on the future of the CAP is worth listening to.

He recently outlined three scenarios for the future of the CAP. The first was to defend the status quo and argue for the biggest possible ongoing payments to farmers based on their contribution towards enhancing the environment. He expected this to be the strategy adopted by COPA, the European farmers' organisation. But (and these are my words) it is well known that COPA is something of a political dinosaur that has lost the CAP plot. Environmental groups are not going to be taken in by a continuation of existing subsidies by other means.

A second option was to advocate a more integrated rural policy, with a much bigger share of aid devoted to correcting market failures to stimulate a more diversified rural economy. Buckwell was, of course, one of the architects of the EU's shift towards a rural policy, although it suffered a severe setback with the 2006 budget settlement which actually cut back Pillar 2 funding for rural development. Its success would also depend on profitable commodity prices and national governments matching EU contributions towards rural development.

A third option would be to ditch the CAP and create what Buckwell has provisionally entitled a European Food and Environment Security Policy. Its objective would be to enable the production of socially optimal quantities of high quality food, energy, biodiversity, landscape and so on.

The problem would be, who decides what is 'socially optimal'? If it's not the market, it's the government, influenced by the farm lobbies, and that is what got us where we are - which is not a good place to start from.

EU loses patience over Indian wine tariffs

The EU has finally lost its patience over India's import restrictions on wine and has filed a complaint with the Disputes Settlement Mechanism of the WTO which has been joined by the US.

Farm commissioner Marian Fischer Boel raised the issue on her recent visit to India. She said, 'These products are not staples and the European exporters have a legitimate interest in being able to supply the Indian market. Could we not leave it up to Indian consumers to decide when to buy domestically produced wines and spirits, and when to buy something else?'

The Indian wine industry claims that a reduction in tariffs would 'destroy' the emerging wine industry with a wave of cheap imports. Indian wine makers would prefer a staged reduction in duties, favouring higher quality imports.

An Indian red at, say, 950 rupees (£11.10) a bottle, can be a third of the cost of an Australian shiraz. The Indian Government's stance on import duties means that foreign access to the £930m alcoholic drinks market, growing at nearly 30 per cent a year, is severely curtailed. While India's basic import duties on wine and spirits are 100 per cent and 150 per cent respectively, federal and state taxes can push tariffs as high as 264 per cent and 550 per cent.

The EU has a fair chance of success at the WTO disputes settlement panel which has ruled against Japan, South Kore and Chile over discriminatory spirits taxation regimes. Getting into the Indian market could help drain the European wine lake and taking on a foreign country is a welcome distraction from attempts to reform the EU wine regime which are meeting substantial resistance, most recently from the European Parliament.

'Suspended pessimism' remains Doha mood

Bilateral discussions have continued between the key participants in the Doha Round farm trade talks, most recently in London, but although clarification of the issues and what might be possible continues, there has been little real progress. Key participants in Geneva have described the overall mood as one of 'suspended pessimism'.

One change is that India has now got more involved in the series of conversations that have hitherto primarily involved the EU, US and Brazil. They had stood aside from the intense meetings between the key players that led to the resumption of negotiations agreed at the World Economic Forum in Davos.

However, India's role so far is not seen as particularly helpful. Susan Schwab, the US trade representative, said that progress with the Europeans and Brazilians was not matched by a willingness by Delhi to make concessions.

India has been taking a hard line on the 'sensitive products' exemption. This is also an area of concern for the EU as a means of protecting its most marginal farmers. But if too many concessions are allowed, a coach and horses would be driven through the agreement.

India is also being insistent about the 'special safeguard mechanism' which would permit developing countries to block sudden surges of imports from particular agricultural products. NGO critics have long argued that 'no agreement is better than a bad agreement', but there is a point beyond which the same argument could be made from a free trade perspective.

No one really knows what the outcome will be, but I would put the chances of a successful agreement at less than fifty per cent. But then there were many times in the Uruguay Round when the position looked hopeless.